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Effective Shared Services: Why Cost Cannot Be the Only Driver
In making the transition towards a business model that includes a shared services center, executives focused on quality have a better track record than those focused primarily on costs.
Shared services centers (SSCs) have undergone considerable evolution over the past years and have become a source of added value for the companies that have implemented them.
Clearly, cost reduction is the key driver for companies that are currently analysing opportunities for setting up shared services centers. However, as Dieter Van Mulders, Head of the European Shared Services Center at PageGroup, discusses here, target location, performance management, talent management, smart taxation and a good audit strategy all have an important part to play in the success of such an endeavour.
What is the most important prerequisite for a successful transition?
Location is of critical importance for the long-term success of any sourcing project. Unquestionably, investors primarily look where the work force is cheaper.
But cost is not the only driver in considering the optimum location for the SSC. The perfect match should be a combination of four key elements:
- Availability of a highly qualified, multilingual workforce
This strategic decision requires an in-depth understanding of the target location, its talent potential and the country’s social, political and economic environment.
The danger of not considering each and every one of these elements can lead to unwise decisions or ill-judged moves, especially when cost is the only driver.
Some companies consider their first move as an intermediate step towards a second relocation. You can to some extent be the victim of your own success: there is always room for more cost savings. SSCs moving from Brussels or Barcelona to Kuala Lumpur or India are not isolated cases.
In Europe, Budapest and Poland are very much in vogue and there is fierce competition for the pool of talent in these countries.
Brussels ranks well due to its central location and access to international and multilingual talent, while Barcelona is attracting a lot of investors, due to an active regional government-led investment incentive policy.
When PageGroup expressed an interest in setting up its shared services center in Barcelona, our delegation received 11 lunch invitations on day one!
What are the key metrics in measuring SSC success?
Measuring performance using the right set of key performance indicators (KPIs) is a major challenge for the SSC head.
But before trend analysis, one needs to think of the processes and create KPIs that are actually comparable. This means implementing one accounts payable tool, one credit and collection process and harmonising marketing practices, to name a few examples.
There also needs to be a clear distinction between the pre- and the post-SSC eras, which are incomparable. The choice of indicators is dictated according to group strategy. This will determine the very nature of the points of improvement.
Typically, the danger here is having KPIs for everything. Such requirements have an impact on cost and make the company more complex, inflexible and ineffective. The enormous challenge is not to lose sight of your company’s overarching objective: delivering quality service.
How does the SSC framework impact recruitment?
Managing teams of sometimes hundreds of employees is a key issue. The stakes are high and multidimensional: you need to find the right people, train them, retain them and offer them attractive career paths.
You need to fully understand the complexity and pace of project activities while taking into account cost constraints. You must keep asking yourself: Can we recruit the right workforce locally? Does it already exist within the organisation? Is there potential for career development for high-performing employees? What expected turnover rate is adequate to meet future demand pressures?
In any case, career development can’t continue endlessly in the long-term but SSC size can complement limited vertical career paths with lateral moves.
Typically, this ‘state of grace’ lasts for three years, until employees run out of road in building their careers. The danger here is to measure ROI (return on investment) on a time horizon of three to five years. One must go far beyond and work hand in hand with talent & development teams.
Planning for a realistic yearly staff turnover of 10% to 20% will reduce resources management risk.
Why are CFOs and financial leaders often the ones to drive this transformation?
Tax savings can compensate for certain costs linked to the SSC implementation. Globally, several countries – especially in Europe and Asia – encourage foreign investment by offering tax breaks. Some companies find it worth considering the charge-back mechanism leading to the transfer of profits from a high tax rate country to a country with a lower tax rate.
The main pitfall here is the dispute over the transfer pricing: rules differ from one country to another. The challenge is to determine accurate, fairly priced and transparent billing. From an audit perspective, a closer coordination between the SSC auditors and those from the different local entities is an absolute must.
It’s also worth noting that such practices are increasingly controversial and generate many column inches of negative publicity, with the potential to impact share value.
The regional finance director must establish a team of auditors dedicated to the SSC. Their work must serve as a basis for the auditors of each single local entity, and thus avoid potential confusion.
The challenge here is to fulfil the obligations shared with auditors operating in a variety of regulatory environments. This is why integrating from a talent perspective should be kept firmly in focus when exploring possible SSC locations. Clearly, potential cost savings and tax-related benefits are not the only criteria that should be factored into the decision.
- Cost is not the only driver in considering the optimum location for the SSC
- While there may be a limit to promotion opportunities in the SSC, the potential for lateral moves increases significantly
- Availability of a highly-qualified, multilingual workforce is a decisive criterion in choosing the SSC location
- Whatever other goals are set, delivering quality service remains paramount